In 2010, following environmental concerns, the Mongolian government passed a new nuclear energy law, requiring all uranium miners to re-register their licences. The new law also established that the state’s share in any uranium joint venture should increase to 51%.
Canadian mining company Khan Resources held the concession to exploit the Dornod uranium mine. Following the passing of the new law, the government invalidated Khan Resources license arguing the investors had breached Mongolia’s national radiation and safety law, had stored radioactive materials in protected areas and had failed to register uranium reserves with the state.
The company took the case to investment arbitration claiming Mongolia had breached its commitments under the Energy Charter Treaty and demanding 358 million USD in compensation. In 2015, the tribunal found Mongolia liable for unlawful expropriation and awarded the claimants more than 80 million USD in damages. That amounts to roughly 16% of Mongolia’s education budget for 2015. Where public spending on education is currently already insufficient to finance new education programmes and teacher training, this is not a sum that Mongolia can afford to lose.
Apart from this crippling award, the Khan case highlights several other problematic aspects of investment arbitration.
Firstly, it shows the harmful effects of what is known as treaty-shopping. Khan Resources Inc., as a Canadian company, could not file a direct ISDS claim using one of Mongolia’s Bilateral Investment agreements because the country does not have such a treaty with Canada. However, as a multi-national operator, Khan could easily avail itself of its offshore holding company in the Netherlands – a so-called letterbox operation set up to enable Khan to avoid taxes through of the generous Dutch double taxation treaties – to bring a claim against Mongolia under the Energy Charter Treaty to which Mongolia has been a party since 1994.
The Khan case also illustrates how, in a world that is characterized by globalised supply chains, transnationally operating companies no longer have a clear nationality. They are headquartered in one country, develop technology in another and produce in various third countries. This makes it very unclear what to define as foreign investment and who investment agreements really protect. Investment protection enforceable with treaty-based dispute settlement simply serves to give the transnational corporate industry a powerful weapon to fend off any government intervention.
Finally, this case also highlights the conflict of interests that plague the international investment arbitration system. Canadian lawyer Yves Fortier, one of the arbitrators selected in the case, served for almost 10 years as a member of the Board of Directors of Canadian mining giant Rio Tinto Alcan (2002-2011).
Last update: May 2021